Corporate Bond Mutual Fund Performance

Abstract

This paper analyzes the relationship between manager tenure and performance in corporate bond mutual funds, using a sample from Morningstar of 665 funds from 2002-2017. Based on a univariate portfolio analysis and panel regressions, the results show a significant positive relationship between average manager tenure and corporate bond performance generally, regardless of whether performance is measured by raw monthly returns or Fama and French (1993)’s five-factor alpha. However, in the crisis periods, this paper documents a significant negative relationship between average manager tenure and fund performance.

Keywords: Manager tenure, corporate bond funds, experience, fund performance

1. Introduction

While there is a large amount of literature on the performance of mutual funds, the amount of literature based solely on corporate bond mutual funds is limited. With the current market environment and demographics of the population, this may be a mistake. According to ICI Factbook, bond mutual funds in 2017 experienced their largest net inflow of the past 5 years. These bond mutual fund inflows can be seen in Figure 1, which shows increasing net new cash flows in bond mutual funds over the last 3 years. It shows a $260 billion inflow in 2017 compared to a $107 billion inflow in 2016. Of this $260 billion, $202 billion went into corporate bond mutual funds. Additionally, although U.S. equity mutual funds account for $10.3 trillion of the $18.7 trillion in total mutual fund assets, these funds had a $236 billion net outflow in 2017. Figure 1 also shows that the total assets of corporate bond mutual funds have been growing over the past three years. These numbers make studies on bond mutual funds more important now than they have been in the past due to the recent growth. The last number to note is that active management accounted for 65% of U.S. mutual funds outstanding in 2017. This shows that while many believe that there is no value in active management, investors still have a high percentage of their assets in active funds. For this reason, active management in both the equity market and bond markets should be studied, even if it may not actually be beneficial to the investor.

Many studies have been done on different aspects of active management in the mutual fund industry regarding how different variables affect performance. For example, one study (Bliss et al., 2008 ) found that mutual funds managed by teams had no difference in performance than mutual funds managed by individuals. Other studies have been conducted based on the merit of the manager. For example, Chevalier & Edison (1999) found that managers that went to high-SAT undergraduate schools experienced better risk-adjusted returns than their peers, and Yuhong & Mazumder (2017) found that managers with either a CFA or MBA performed better than managers without either. These studies were both performed on active mutual funds, regardless of classification. This paper’s aim will be to examine only corporate bond mutual funds and whether the average tenure of the manager, or managers, running a mutual fund affects the performance of that fund. This is important because as detailed above, investors still have an interest in active mutual funds, and they should have all the information possible regarding what factors can influence a mutual fund’s return. This study will focus on corporate bond mutual funds for two reasons. The first reason, mentioned above, is due to the increasing inflows corporate bond mutual funds have received over the past three years, and also as a result of the possible growth in the bond market in the near future. This growth may stem from the fact that baby boomers are reaching retirement age and will likely be moving more of their retirement into bond mutual funds. Another driver of possible increased assets in bond mutual funds is the fact that interest rates may continue to be raised over the next few years with the economy showing strong growth and analysts predicting two rate hikes in 2019. As interest rates go up, more investors will look to active bond mutual funds to invest their money and get the best yield possible. These points make it interesting to analyze whether funds with longer average manager tenure have outperformed funds with shorter average manager tenure in the past, which may indicate that investors in the future may want to consider a bond mutual fund’s average manager tenure before deciding which fund to invest in.

The results of this paper show a significant positive relationship between average manager tenure and performance in most cases. The only case where this differs is during the crisis period where longer tenured funds’ performance actually had a statistically significant negative relationship with average manager tenure. The pre and post-crisis periods, however, show a stronger positive relationship between tenure and performance than the full-time period. In general, the relationships between average manager tenure and performance is stronger in investment-grade funds. This may be due to a smaller number of funds in the high yield sample. Still, the relationship is statistically significant in most cases, specifically when looking at the regression for solely investment grade funds, compared to solely high yield funds, where the regression shows no statistically significant relationship.

This paper has some contribution to past literature. It is one of the first papers to strictly look at manager tenure and performance using multiple techniques and looking at multiple time periods. It also documents convincing evidence that a fund’s average manager tenure has a positive relationship with performance in corporate bond mutual funds, and specifically investment grade corporate bond mutual funds.

The rest of the paper proceeds as follows. Section 2 highlights past research on the topic of persistence in mutual funds, and on the topic of manager tenure and how it affects mutual fund performance. Section 3 outlines the formation of the hypothesis and what different results would imply about it. Section 4 outlines the data and key variables that will be used in the empirical analysis to test the hypothesis. Section 5 details the methods of analysis that will be used to study the relationship between tenure and performance. In Section 6, the main empirical results of the paper regarding manager tenure and expected corporate bond returns are presented. Section 7 is the conclusion of the paper.

2. Literature Review

        This section talks about the research that is relevant to the topic of manager tenure and corporate bond mutual funds. Section 2.1 talks about studies that have been done on the topic of persistence. It also talks about studies that research the difference in performance of active and passive on mutual fund performance. The characteristic in focus in this section is manager tenure funds. Section 2.2 discusses research related to manager characteristics and their effects